Tesla’s Faux Goal

Tesla’s Faux Goal

Model S Factory, Fremont, California Source: LA Times

During a conference call yesterday discussing Tesla Motors’ latest earnings, CEO Elon Musk surprised everyone by announcing that the company will aim to produce 500,000 cars by 2018, which is two years earlier than the 2020 date that had been previously set. That goal certainly got Wall Street’s attention: the company’s stock rose nearly 7% in after hours trading.

The stock price has come back to Earth since the stock market opened…and even gone a little lower than that. By 3 PM New York time on Thursday afternoon, the stock was down 4% from its Thursday close (before earnings were announced). The see-sawing stock price is probably just another manifestation of the shorts vs. longs melodrama that has been twisting Tesla’s valuation for years. Or it could be a sign that Wall Street, after a night to sleep on it, realized something this morning: There’s no way Tesla can meet that ambitious goal of 500,000 cars by 2018.

Count us amongst the doubters. Launching a new car model is an extremely difficult endeavour, akin to conducting a ten-thousand musician orchestra. Thousands of parts manufacturers, toolmakers, materials suppliers and service contractors must meet multiple stages of cost and calendar goals. And each of those players must in turn be pushing their supply chain for similar deadlines and pricing discounts. If a single key supplier is off their target, it’s like the entire concert being ruined by a screechy violin. That’s why the automotive industry tends to go slow on launches: starting with a few tens of thousands of cars and then adding slowly from there. It’s also why carmakers design shared platforms: if a chassis or drivetrain is already developed for another model, a certain level of uncertainty is taken out of the new model launch.

Tesla is giving itself no such leeway. The Model 3 is a completely separate platform from the Model S/Model X design. Everything about the Model 3 will be new. That includes a new battery, a new battery pack, new seats, new windshields, etc. Orchestrating such a model launch in just one and a half years is not just ambitious. It strains the credulity of anyone who is familiar whith modern automotive supply chains. Going from zero-cars-built to 350,000 cars built (that’s assuming that the Model S and Model X keep their sales trajectories going through 2018) in eighteen months has never come close to being done before.

Of course, we have to drop in here the standard default word of caution on doubting Elon Musk: Nobody who bet against him has ever won; he’s always performing miracles; etc. etc. But no matter how excellent their CEO is, one human being can’t conduct this kind of miracle.

So what happens if, by the end of 2018, Tesla Motors fails to produce 500,000 cars? Nothing much. Tesla will have already raised its capital to finance the big push and it will probably have reached profitability at that point anyway. Whether the company is able to manufacture 200,000 or 500,000 cars won’t have a tremendous impact on the company’s overall financial health (assuming it is able to raise a few billion dollars worth of capital in the next few months) or on its narrative as a game-changing actor in the transportation industry. In ten years’ time, when Tesla is regularly cranking more than a million vehicles off its multiple manufacturing lines each year, nobody will care that it didn’t produce 500,000 cars in 2018. And that’s the biggest reason why we aren’t altering our forecast based on the new guidance from Tesla: because they don’t have to hit their own goal. As Musk himself said in reference to a supplier deadline they are setting: “Even if you know the term papers will be late, the professor still has to set a due date.”